The Future of Work: VCs discuss entrepreneurship and startup investment trends of 2020
Covid-19 has already had tremendous impact on workers across the world; while the unemployment rate is growing at an unprecedented pace -- reaching nearly 15% in the US -- the highest in history since the Great Recession in the 1930s, the final tally of consequences on companies and the economy is still unclear.
For the startup ecosystem the effects of the health crisis are already here, more than 20,000 employees are already looking for a new job on Switch due to the coronavirus’ impact on their company and more than 1,000 companies have been laying off on the platform.
We’ve had the chance to discuss the future of work, and the impact of the crisis on entrepreneurship and investments with 4 VCs that are in the frontline during this crisis helping their portfolio companies weather the storm.
20% of startups accelerated growth during the crisis while the rest stagnates or falls behind
Companies are impacted by the crisis very differently. Romain Lavault, Partner at Partech, sees the nuances of the current situation “Approximately 20% are severely impacted due to social distanciation and have no choice than to scale down and sometimes pause operations until the end of the lockdown, with no guarantee that the business will pick up quickly”.
But surprisingly, another 20% of startups have seen positive outcomes through the COVID-19 crisis with growth rates going from 2X to 10X since its started; “For those, it’s not just a temporary shift, it’s the beginning of a long term transition to new ways of doing business and they are at the forefront” Lavault concludes.
This positive outcome seems to have impacted certain industries such as EdTech more than others. We’ve spoken with the Brighteye team, a European investor in the education space, on their conclusion of the crisis so far on their major investment industry; “We’ve been somewhat fortunate in spite of the terrible circumstances surrounding the pandemic. Learning technology came to the fore. Overall, 75% of our current investments are either positively or not significantly impacted by COVID-19” says David Guerin, Principal at Brighteye Ventures. The EdTech industry has been part of the sectors that have been the luckiest, but other sectors have also been spared. Rob Kniaz, founding partner at Hoxton Ventures, also agrees “Of course, [the crisis] its impacting every company in different ways. On the whole we've had more positive surprises than negative - sectors like digital health, P2P marketplaces and ecommerce have proven quite resilient and seen increases in usage as people are looking for things to do while stuck at home”.
Safety first for early stage startups: slow down hiring to focus on cash management
Although positively surprised by the outcome of the crisis so far for most startups, the main advice is to remain cautious during these times. The majority of them, some 60%, even though not directly, are impacted by the side effects, Romain Lavault confirms. Mostly, he says, “by the difficulty to create new business relationships during lockdown or run supply chains efficiently. These companies have put their growth on hold, now operating at 75% to 100% capacity to extend their cash runway.
The majority of the early stage startups at Hoxton Ventures have primarily focused on being frugal with non-essential spending, but most have long buffers to prevent any immediate issues. Same conclusion for Jean de la Rochebrochard, Partner at Kima Ventures and for the Brighteye team, despite the boost, in times of uncertainty, most startups have slowed down hiring to focus on cash management, go-to-market strategies and product roadmaps.
But in some cases, the current state of the economy has brought its share of surprises by making it the best time to hire talent; the Brigheye team still has portfolio companies such as TeachFX, Aula, Zen Educate, Ornikar and Epic! hiring for specific roles, and same is true for the Hoxton Ventures portfolio; “Companies like Preply in particular are on a hiring spree to fill roles otherwise tougher to fill in a more robust market”.
A global slow down of investments in the startup ecosystem
“On a macro level, we don’t anticipate a quick recovery” the Brighteye Team predicts “It is going to take a while for things to go back to a “new normal”; and that applies to VC investments as well”.
Romain Lavault also agrees and predicts that most funds will find it difficult to close deals in remote conditions which will create a “deceleration on the market, aggravated by a looming recession and the pressing need to support existing portfolio companies”. Jean de la Rochebrochard agrees with Lavault’s point to focus on the existing portfolio, he sees “strong seed opportunities and few exceptional series A in the making”.
According to Rob Kniaz, certain sectors will be blacklisted from VCs investment lists; such as travel and hospitality industries but the difficulty will mainly lie with US funds “[US funds] will find it a bit more difficult to travel and meet the founders, which is usually mandatory for larger A-round deals and beyond.”
The Brighteye team has also kindly shared with us their main observation from the beginning of the covid-19 crisis that might hold true through the end of the year;
- VCs are investing more slowly and smaller amounts, particularly at the early stage. Seed and Series A round sizes have decreased by 15% and a recent Kauffman Fellows survey showed 75% of investors slowing down pace of investment.
- Lower investment volume has meant that the deals getting done are generally more investor friendly: VCs are still willing to take risks but at a premium. The bar is now higher for entrepreneurs to unlock capital, and generally VCs are looking for lower valuations and/or friendlier terms than they were 3 months ago.
But capital is still available at entrepreneur friendly terms
That said, exceptional companies continue to set their own terms, the team at Brigheye Ventures tells us. “As recent rounds for unicorns Figma and Applyboard demonstrate, if you have rocketship growth amid the current conditions”. The latest is particularly true Lavault confirms “there has never been more dry powder in VC Funds ever (€30B in European VC alone) so even though everyone will proceed with caution, the market will not pause and we don’t expect valuations to decrease in a dramatic way. Good companies will continue to raise good rounds! We have closed 10 deals since the beginning of the crisis and we don’t plan on stopping!”
Remote management has accelerated the transformation of the most impacted industries.
Although Lavault is reminding us that things are more complex than just “everything remote”; “consumers and businesses are re-evaluating their priorities” he says. Kniaz from Hoxton partners adds that “the effect of the lockdowns globally has pushed even more consumers to online behavior, whether it's remote-first products like distance learning, remote health, SaaS and productivity to support remote teams better”.
Now that companies have been forced to rethink the management of their workforce, new trends will rise from it, Brighteye Ventures predicts, “On this basis, we expect to see: 1) an increase in workplace flexibility policy as remote working will become more mainstream 2) a general upgrade of tools/platforms enabling distance collaboration, distance learning and remote hiring”.
“The short-term economic uncertainty coupled with the realization that such pandemic will remain a constant threat” says Lavault “will accelerate the transformation of the most impacted industries such as travel, mobility, hospitality, food, retail,education, healthcare”. And on the latest, Kniaz adds that “on the life sciences side the current rush to support millions of sick people has forced regulators to take a more fluid approach to new technologies that can alleviate burdens in the clinical area.”.
Traditional sectors will be heavily challenged by alternative solutions brought on by the recession.
“As unemployed and underemployed people look to develop skills in resilient sectors of the economy (including tech, education and healthcare) alternative learning solutions will come to challenge traditional educational institutions -- particularly in higher education and lifelong learning” says David Guerin sharing the Brighteye team vision. Fullstack online learning products, bootcamps, blended programs, informal peer to peer learning networks among others will gain in popularity as long as they can deliver tangible outcomes to learners (i.e. job placement, certifications, skill development, etc.) more efficiently and cheaper than traditional education institutions.
As revenues decrease across many industries, companies will also look to adopt technology to lower costs and drive efficiency, “Corporations will focus on process automation and employee training”, believes the Brighteye team, “Automation will disrupt careers and cause companies to shed some employees and reshuffle others, yielding to a strong focus on upskilling and reskilling workforce to cope with the recession and effectively managing HCM (skills gap).”
Opportunities for a new generation to reshape the world
“This is a land – and a generation– of opportunities for entrepreneurs who are starting from a blank page today and can address this new demand from Day 0.” says Lavault. “This comes at a time when the Gen Z is becoming the new driving force and the largest generation ever with 2.5B people. This Generation represents the next biggest consumer audience – and source of talent – for businesses and the cradle where the next unicorns are being fabricated at the moment.”
We’ve yet to see the final fallout of this global pandemic recession but we can predict that we will be probably surprised by the outcome. Jean de la Rochebrochard envisions a new rise of local marketplaces and the reshaping of the future of work. In the meantime, entrepreneurs are encouraged to challenge present norms and to navigate with caution the troubled waters of the COVID-19 ocean.
What are the most decisive factors that entrepreneurs need to keep in mind to successfully drive their companies towards success?
In 2020, Profit-able is the New Black
“In the 2020 Summer collection, profitability is the new black. There is a clear premium for startups who control their destiny (and fundraising needs)” affirms Romain Lavault. “If you have the luxury of having enough cash in the bank, delay your fundraising process by a few months because uncertainty is pricing in a discount.” adds the Brighteye Team.
A good control of a company’s destiny includes a budgeting plan forecasting a bad case scenario (i.e. lower marketing ROI) and an understanding of how companies’ customers will evolve in the current climate. Kniaz adds; “I think smart entrepreneurs have to look downstream and understand what's the perspective of their own customers. Consumers are adapting to more time at home, so companies need to strongly consider how they sell better online (often mobile-first) and provide better support digitally.”
The keyword here is “anticipation”: you need to try to predict and prepare for worst case scenarios that could happen; “you don't know what you don't know, only the paranoid survive!” concluded Jean de la Rochebrochard.
Talent will remain a cornerstone in the success of a company.
No compromise on hiring for Romain Lavault. “One thing will not go away though: talent is absolutely key! I like this African saying “If you want to go fast, go alone. But if you want to go far, go together”.”
As a general advice in times of crisis VCs agree that culture and company mission are essential to the success of a company, especially in the startup ecosystem where a company is at human size. “Make your team’s morale your top priority”; concludes the Brighteye team “ Your team is what really matters at the end of the day”.
Thank you to Romain Lavault, Rob Kniaz, Jean de la Rochebrochard and the Brighteye team for your thoughts and advice.